by Rajeshwar Burla, Co-Group Head & Vice President, Corporate Ratings, ICRA
Massive scale up of Infrastructure Investment: Pace of Infrastructure Investment planned to be doubled in next five years
The Central Government has set an investment target in infrastructure of over Rs. 111 lakh crore during FY2020-FY2025 under national infrastructure pipeline (NIP). The planned NIP would translate into an average annual investment of Rs. 18.5 lakh crore, which is a significant increase from the pace of infrastructure investment of Rs. 10 lakh crore in FY2019. With slower than projected start to the NIP, achieving the target would require significant step-up in investments in the remaining four years (FY2022-FY2025) with average investment of over Rs. 21 lakh crore per annum
Majority of the allocation towards transportation – road infrastructure
Majority of the targeted Rs. 111 lakh crore infrastructure investment is planned towards transportation, energy, and urban infrastructure. Roads and railways will remain the key drivers of the mega investment plan. Urban housing & infrastructure, power, and oil & gas sectors are also expected to witness a good proportion of the capital allocation. About 79% of the projects will be implemented by Centre and State Governments, while the balance 21% is under private sector.
Union Budget 2021-22 positive for infrastructure
FY2022 is a crucial year for two reasons: a) the importance of Government spending on infrastructure to revive the economy and b) the significant catch up required in the ongoing NIP. The Union Budget 2021-22 has increased the capital outlay for infrastructure sector. The gross budgetary support towards capital expenditure has been increased significantly to Rs. 5.54 lakh crore in 2021-22 BE (up 34% from 2020-21 BE, and 26% from 2020-21 RE) with higher allocation towards the infrastructure sector (roads, railways, etc). The Central Government has also provided a capital of Rs. 0.45 lakh crore as a support for the Infrastructure Pipeline.
EXHIBIT 3: Budgeted capital outlay for key infrastructure segments in FY2022
|
Capital Outlay (Rs. Crore) |
2020-21 BE |
2020-21 RE |
2021-22 BE |
Growth over BE |
Growth over RE |
|
Railways |
160,792 |
240,840 |
214,858 |
34% |
-11% |
|
Road Transport and Highways |
146,975 |
157,053 |
198,230 |
35% |
26% |
|
MRTS and Metrorail |
20,471 |
9,473 |
24,582 |
20% |
160% |
|
Ports, Shipping, and Waterways |
3,715 |
3,129 |
4,917 |
32% |
57% |
(Source: Budget documents; ICRA research)
Much of infrastructure financing in the country is currently supported by the banking sector and a few infrastructure NBFCs. Together these have an outstanding credit of Rs. 24.2 lakh crore to the infrastructure sector. Availability of long-term infrastructure financing continues to remain a challenge given the twin problems faced by these lenders— asset-liability mismatch and increase in stressed assets. In the light of the huge funding requirements of NIP, the importance of availability of adequate financing avenues for infrastructure becomes even more critical now.
The existing sources of financing would be able to meet 83–85% of the capital expenditure to be incurred between fiscals 2020 and 2025. The NIP task force recommends that a proportion of the financing gap could be met through establishing new DFIs and using asset monetisation as a tool to monetise operational assets by both the GoI and States. Nevertheless, a shortfall of about 10% remains, financing for which is not certain as of now. The setting up of a new development finance institution (DFI) with an initial allocation of Rs. 20,000 crore in the recent budget is a positive. The new DFI would in turn be able to leverage and fund infra projects worth around Rs. 2 lakh crore (assuming D/E of 9:1). The target is to have a lending portfolio of at least Rs. 5 lakh crore for this DFI in three years.
NIIF and InvITs can play an important role
National Investment and Infrastructure Fund (NIIF) has entered into MoUs with some large investors and has secured funding commitment both from Government of India and other investors and is better placed to mobilize funds and invest in Infrastructure assets. The Union Budget has also provided Rs. 1,000 crore capital towards the NIIF Infrastructure Debt Financing Platform which could be leveraged to provide debt funding to the sector. The NIIF debt platform is targeting to build debt portfolio of Rs. 1 lakh crore by 2025 with the support of equity capital by the Government and NIIF Strategic Opportunities Fund.
Infrastructure Investment Trust (InvITs) have shown the potential of channelising long-term capital (like pension and insurance funds) into the infrastructure sector. Insurance companies, mutual funds and pension funds have minimal presence in infrastructure. InvITs are expected to see healthy traction in the near to medium term, supported by the track record of entities which have already floated such structures, enabling regulatory developments and focus on attracting investments into the infrastructure space. With InvITs now recognised as borrowers under the SARFAESI Act, lenders to these trusts, shall have adequate statutory enforcement options, absence of which was earlier becoming a constraint to lend directly at trust level. Further, Insurance Regulatory and Development Authority of India (IRDAI) has recently allowed insurers to invest in debt instruments of InvITs rated AA and above as a part of their approved investments, which evidences growing comfort of investors around such structures. GoI for its national monetisation pipeline is also using these platforms for NHAI, PowerGrid and GAIL among others. NHAI and PowerGrid together are expected to monetise assets worth Rs. 25,000 crores through this route. The funds thus raised will be used towards funding new projects. Till date, assets worth Rs. 1.4 trillion have been floated through InvITs. The capital raising by InvITs is also aided by the favourable view that investors have taken on the long-term revenue generation potential of infrastructure assets in the country.
(Source: MORTH, ICRA research)
Sector Focus: Roads and Highways
Over the last seven years, the Government focused on addressing the execution bottlenecks. Most of these measures were fully implemented by the end of FY2015 and, therefore, FY2016 saw a sharp pick-up in execution by 37%, with the execution rate reaching 16.6 km/day for Ministry of Road Transport and Highways (MORTH). Thereafter, with healthy new project awards and continued focus on de-bottlenecking the pace of execution further increased to 29.7 km/day in FY2019 before declining to 28.0 km/day in FY2020 due to impact of Covid-19 in March 2020.
To mitigate the adverse impact of Covid-19 on the road contractors, the MORTH has initiated a slew of relief measures like shift from milestone-based billing (typically ranging between 45-75 days) to monthly billing and release of retention money / performance security in proportion to the work already executed among others. These initiatives have helped in reducing the cash conversion cycle, while also getting the performance guarantees and associated margin monies released for the executed portion of the projects. Notwithstanding the high cost of re-mobilising labour, many road contractors made special arrangements to facilitate return of labour due to improved cash conversion cycle from MORTH/ NHAI projects. Execution which was 73% down (on YoY basis) in April 2020 due to nationwide lockdown picked up pace from June 2020; ably supported by the liquidity boosting measures by MORTH and NHAI; the execution in FY2021 stood at 13,327 km, 30% higher than 10,237 km in FY2020. Overall, the execution grew at a CAGR of ~20% during FY2015 – FY2021. The execution in 3M FY2022 (Apr -June) stood at 2284 km as against 1823 km in 3M FY2021.
While the second wave of Covid-19 caused some disruption in the overall construction activity in the country, the performance of most mid and large-sized road construction companies is not expected to be materially impacted due to this. Most of the road projects are located in remote areas, or at a distance from the metro/large cities. Given that the sector had faced a more intense effect during the first wave, most companies have improved their preparedness in terms of labour and raw-material availability. Furthermore, unlike the first wave, there is no nationwide lockdown, only localised restrictions are imposed with exemption for construction activities.
The strong project pipeline of under construction projects, limited impact of second wave on road construction activity along with massive increase in the budgetary allocations is expected to support the pace of execution for road projects. Consequently, highway construction likely to surpass 40 km/day in FY2022.
